Request for Information and Comment on Rules, Regulations, Guidance, and Statements of Policy Regarding Bank Merger Transactions
Request for information and comment.
CFR Part: "12 CFR Part 303"
RIN Number: "RIN 3064-ZA31"
Citation: "87 FR 18740"
Page Number: "18740"
"Proposed Rules"
Agency: "
SUMMARY: The
DATES:
Comments must be received by
ADDRESSES: Commenters are encouraged to use the title "Request for Comment on Rules, Regulations, Guidance, and Statement of Policy on Bank Merger Transactions (RIN 3064-ZA31)" and to identify the number of the specific question(s) for comment to which they are responding. Please send comments by one method only directed to:
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FOR FURTHER INFORMATION CONTACT:
SUPPLEMENTARY INFORMATION:
Background Information Significant changes over the past several decades in the banking industry and financial system necessitate a review of the regulatory framework that applies to bank merger transactions involving one or more insured depository institutions pursuant to the Bank Merger Act. /1/ First, more than three decades of consolidation and growth in the banking industry have significantly reduced the number of smaller banking organizations and increased the number of large and systemically-important banking organizations. Second, the
FOOTNOTE 1 Bank Merger Act, Public Law 86-463, 72 Stat. 129 (1960); Bank Merger Act Amendments of 1966, Public Law 89-356, 80 Stat. 7 (codified as amended at 12 U.S.C. 1828(c)(2018)), available at fdic.gov/regulations/laws/rules/1000-2000.html#1000sec.18c. END FOOTNOTE
Consolidation in the Banking Sector
The banking sector has experienced a significant amount of consolidation over the last 30 years as shown in Tables 1 through 3. This period of consolidation, fueled in large part by mergers and acquisitions, has contributed to the significant growth of the number of large insured depository institutions, especially insured depository institutions with total assets of
In 1990, there was only one insured depository institution with assets greater than
FOOTNOTE 2 Prior to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, Public Law 103-328 (the Riegle-Neal Act of 1994), many states did not permit intra-state branching and interstate branch branching was not permitted. Following the passage of the Riegle-Neal Act of 1994, many bank holding companies chose to consolidate existing bank charters. END FOOTNOTE
FOOTNOTE 3 See Financial Stability Board, 2020 list of global systemic important banks, available at https://www.fsb.org/wp-content/uploads/P111120.pdf. END FOOTNOTE
Consolidation also has contributed to the economic landscape of insured depository institutions with assets less than
FOOTNOTE 4 Based on Thrift Financial Reports (TFR) and Consolidated Reports of Condition and Income (Call Report) between 1990 and 2005, the number of institutions with assets less than
Over this same period, the number of insured depository institutions with assets between
Several insured depository institutions with assets less than
Table 1-Number of Insured Depository Institutions by Asset Size
Year
Asset size 1990 2005 2020
$ 10B-$ 50B 52 86 102
$ 50B-$ 100B 7 21 16
$ 100B-$ 250B 1 5 20
$ 250B-$ 500B 0 3 8
$ 500B-$ 700B 0 0 1
>/=$ 700B 0 3 4
Source: TFR and Call Reports.
Table 2-Percentage of Industry Assets Held by Insured Depository Institutions by Asset Size
Year
Asset size 1990 2005 2020
(%) (%) (%)
$ 10B-$ 50B 20.2 16.7 10.5
$ 50B-$ 100B 10.0 13.1 5.3
$ 100B-$ 250B 3.4 7.2 13.3
$ 250B-$ 500B 0.0 11.1 13.9
$ 500B-$ 700B 0.0 0.0 2.5
>/=$ 700B 0.0 25.8 39.8
Source: TFR and Call Report.
Table 3-Percentage of Domestic Deposits Held by Insured Depository Institutions by Asset Size
Year
Asset size 1990 2005 2020
(%) (%) (%)
$ 10B-$ 50B 18.5 16.6 11.4
$ 50B-$ 100B 6.4 12.2 5.9
$ 100B-$ 250B 1.2 6.4 13.9
$ 250B-$ 500B 0.0 12.8 14.3
$ 500B-$ 700B 0.0 0.0 2.6
>/=$ 700B 0.0 17.8 35.5
Source: TFR and Call Report.
The Financial Stability Factor in the
The Dodd-Frank Act made a number of statutory changes aimed at addressing the risks posed by the largest banks, including an amendment to the Bank Merger Act requiring consideration of the risk posed to the stability of
FOOTNOTE 5 Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, section 604(f), 124 Stat. 1376, 1602 (2010) (codified as 12 U.S.C. 1828(c)(5) (2018)), available at https://www.govinfo.gov/app/details/PLAW-111publ203. END FOOTNOTE
FOOTNOTE 6 See Federal Reserve Board and
In particular, the failure of a large insured depository institution would present significant challenges to the
FOOTNOTE 7 Although the
In recent history, including the global financial crisis that began in 2008, the most common resolution transactions have involved a purchase and assumption transaction where an acquiring institution takes all or a substantial part of the failed insured depository institution. For example, between 2008 and 2013, there were a total of 489 bank failures, of which 463, or approximately 95 percent, were resolved by the
While most of these purchase and assumption resolution transactions were for insured depository institutions with assets under
FOOTNOTE 8 While the systemic risk exception was approved,
Recent Executive Order
Additionally, on
FOOTNOTE 9 See https://www.whitehouse.gov/briefing-room/presidential-actions/2021/07/09/executive-order-on-promoting-competition-in-the-american-economy/and https://whitehouse.gov/briefing-room/statements-releases/2021/07/09/fact-sheet-executive-order-on-promoting-competition-in-the-american-economy/. END FOOTNOTE
Conclusion
In light of the significant consolidation in the banking industry over the past three decades, the federal banking agencies requirement to consider financial stability risk under the BMA, the
Bank Merger Act Overview
The Bank Merger Act established a framework that required, in general, consent of the responsible agency prior to a merger. /10/ With respect to merger transactions solely involving insured depository institutions, the responsible agency is the
FOOTNOTE 10 Bank Merger Act, Public Law 86-463, 72 Stat. 129 (1960); Bank Merger Act Amendments of 1966, Public Law 89-356, 80 Stat. 7 (codified as amended at 12 U.S.C. 1828(c)(2018)), available at fdic.gov/regulations/laws/rules/1000-2000.html#1000sec.18c. END FOOTNOTE
FOOTNOTE 11 Pursuant to Title III of the Dodd-Frank Act, all functions of
FOOTNOTE 12 12 U.S.C. 1828(c)(1) and (2). For an uninsured national bank, OCC approval of the bank's application under 12 CFR 5.33 is also required. END FOOTNOTE
In addition, the Bank Merger Act generally requires that, prior to approving any merger, the responsible agency must (a) ensure that notice of a proposed transaction be published; (b) request a report on competitive factors from the Attorney General of
FOOTNOTE 13 12 U.S.C. 1828(c)(3)-(5) and 1828(c)(11). END FOOTNOTE
When assessing the potential anticompetitive effects of the proposed merger, the responsible agency is required to consider whether the merger would substantially lessen competition, tend to create a monopoly, or otherwise be in restraint of trade. /14/ In no case may the responsible agency approve a merger transaction that would result in a monopoly, and the responsible agency may not approve any merger that exhibits anticompetitive effects unless the responsible agency determines "that the anticompetitive effects of the proposed transaction are clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served." /15/ Further, the responsible agency may not approve an application for an interstate merger transaction if the resulting insured depository institution would control more than 10 percent of the total amount of deposits of insured depository institutions in
FOOTNOTE 14 All things being equal, the number of competitors in the market for banking products and services can be affected by two different types of transactions: Unaffiliated depository institutions can merge with each other; or depository institutions can be acquired by unaffiliated companies that already own one or more depository institutions. Companies that own or and control depository institutions are commonly known as depository institution holding companies and may either be bank holding companies or savings and loan holding companies. Depository institution holding companies are regulated by the Board. Bank holding companies are subject to the BHCA (for companies owning state and national banks, see 12 U.S.C.
FOOTNOTE 15 12 U.S.C. 1828(c)(5)(B). END FOOTNOTE
FOOTNOTE 16 12 U.S.C. 1828(c)(13)(A). END FOOTNOTE
In addition to consideration of anticompetitive effects, the Bank Merger Act requires that: "In every case, [emphasis added] the responsible agency shall take into consideration the financial and managerial resources and future prospect of the existing and proposed institutions, the convenience and needs of the community to be served, and the risk to the stability of
FOOTNOTE 17 Id. END FOOTNOTE
FOOTNOTE 18 Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, sec. 604(f), 124 Stat. 1376, 1602 (2010) (codified as 12 U.S.C. 1828(c)(5) (2018)), available at https://www.govinfo.gov/app/details/PLAW-111publ203. END FOOTNOTE
The requirements of the Bank Merger Act are incorporated into 12 CFR part 303 of the
FOOTNOTE 19 12 CFR part 303, available at https://www.fdic.gov/regulations/laws/rules/2000-250.html. END FOOTNOTE
FOOTNOTE 20 12 CFR 5.33, available at https://www.ecfr.gov/current/title-12/chapter-I/part-5. END FOOTNOTE
In the
FOOTNOTE 21 See 12 CFR 303.1-303.19. END FOOTNOTE
FOOTNOTE 22 See 12 CFR 303.60-303.65. END FOOTNOTE
FOOTNOTE 23 63 FR 44762,
For those transactions requiring
FOOTNOTE 24 The
The OCC's regulation, at 12 CFR 5.33, provides a framework for evaluating mergers, which includes the consideration of the risk to financial stability. 12 CFR 5.33 generally addresses business combinations involving a national bank or federal savings association. Section 5.33(c) covers the licensing requirements for business combinations. The factors the OCC considers in all business combinations, including business combinations under the BMA, are set forth in
When considering the risk to the stability of the banking or financial system pursuant to a BMA application, the OCC considers six factors: (1) Whether the proposed transaction would result in a material increase in risks to financial system stability due to an increase in size of the combining institutions; (2) whether the transaction would result in a reduction in the availability of substitute providers for the services offered by the combining institutions; (3) whether the combined institution would engage in any business activities or participate in markets in a manner that, in the event of financial distress of the combined institution, would cause significant risks to other institutions; (4) whether the transaction would materially increase the extent to which the combining institutions contribute to the complexity of the financial system; (5) whether the transaction would materially increase the extent of cross-border activities of the combining institutions; and (6) whether the transaction would increase the relative degree of difficulty of resolving or winding up the combined institution. /25/
FOOTNOTE 25 See, e.g., OCC Conditional Approval No. 1031 (
1995 Bank Merger Competitive Review Guidelines /26/
FOOTNOTE 26 In
In order to expedite the competitive review process required by the BHCA, Home Owners Loan Act (HOLA), and the Bank Merger Act, and to reduce regulatory burden, the
FOOTNOTE 27 Available at http://justice.gov/atr/bank-merger-competitive-review-introduction-and-overview-1995. END FOOTNOTE
FOOTNOTE 28 The HHI is a statistical measure of market concentration and is also used as the principal measure of market concentration in the
However, the Guidelines provide that the federal banking agencies may examine a merger transaction in greater detail if the federal banking agencies believe additional scrutiny is necessary. As part of this further examination under the Guidelines, the federal banking agencies may consider, among other things, whether there is evidence that (a) the merging parties do not significantly compete with one another; (b) rapid economic change has resulted in an outdated geographic market definition and an alternate market is more appropriate; (c) market shares are not an adequate indicator of the extent of competition in the market; (d) a thrift institution is actively engaged in providing services to commercial customers, particularly loans for business startup or working capital purposes and cash management services; (e) a credit union has such membership restrictions, or lack of restrictions, and offers such services to commercial customers that it should be considered to be in the market; (f) there is actual competition by out-of-market institutions for commercial customers, particularly competition for loans for business startup or working capital purposes; and (g) there is actual competition by non-bank institutions for commercial customers, particularly competition for loans for business startup or working capital purposes. /29/
FOOTNOTE 29 Section 2 of the Interagency Guidelines, available at www.justice.gov/atr/bank-merger-competitive-review-introduction-and-overview-1995. END FOOTNOTE
Request for Comment
The
Question 1. Does the existing regulatory framework properly consider all aspects of the Bank Merger Act as currently codified in Section 18(c) of the Federal Deposit Insurance Act?
Question 2. What, if any, additional requirements or criteria should be included in the existing regulatory framework to address the financial stability risk factor included by the Dodd-Frank Act? Are there specific quantitative or qualitative measures that should be used to address financial stability risk that may arise from bank mergers? If so, are there specific quantitative measures that would also ensure greater clarity and administrability? Should the
Question 3. To what extent should prudential factors (for example, capital levels, management quality, earnings, etc.) be considered in acting on a merger application? Should bright line minimum standards for prudential factors be established? If so, what minimum standard(s) should be established and for which prudential factor(s)?
Question 4. To what extent should the convenience and needs factor be considered in acting on a merger application? Is the convenience and needs factor appropriately defined in the existing framework? Is the reliance on an insured depository institution's successful Community Reinvestment Act performance evaluation record sufficient? Are the convenience and needs of all stakeholders appropriately addressed in the existing regulatory framework? To what extent and how should the convenience and needs factor take into consideration the impact that branch closings and consolidations may have on affected communities? To what extent should the
Question 5. In addition to the HHI, are there other quantitative measures that the federal banking agencies should consider when reviewing a merger application? If so, please describe the measures and how such measures should be considered in conjunction with the HHI. To what extent should such quantitative measures be differentiated when considering mergers involving a large insured depository institution and mergers involving only small insured depository institutions?
Question 6. How and to what extent should the following factors be considered in determining whether a particular merger transaction creates a monopoly or is otherwise anticompetitive?
Please address the following factors:
(a) The merging parties do not significantly compete with one another;
(b) Rapid economic change has resulted in an outdated geographic market definition and an alternate market is more appropriate;
(c) Market shares are not an adequate indicator of the extent of competition in the market;
(d) A thrift institution is actively engaged in providing services to commercial customers, particularly loans for business startup or working capital purposes and cash management services;
(e) A credit union has such membership restrictions, or lack of restrictions, and offers such services to commercial customers that it should be considered to be in the market;
(f) There is actual competition by out-of-market institutions for commercial customers, particularly competition for loans for business startup or working capital purposes; and
(g) There is actual competition by non-bank institutions for commercial customers, particularly competition for loans for business startup or working capital purposes. With respect to the preceding factors, how and to what extent should the activity of current branches or pending branch applications be considered?
Question 7. Does the existing regulatory framework create an implicit presumption of approval? If so, what actions should the
Question 8. Does the existing regulatory framework require an appropriate burden of proof from the merger applicant that the criteria of the Bank Merger Act have been met? If not, what modifications to the framework would be appropriate with respect to the burden of proof?
Question 9. The Bank Merger Act provides an exception to its requirements if the responsible agency finds that it must act immediately in order to prevent the probable failure of one of the insured depository institutions involved in the merger transaction. To what extent has this exception proven beneficial or detrimental to the bank resolution process and to financial stability? Should any requirements or controls be put into place regarding the use of this exemption, for example when considering purchase and assumption transactions in a large bank resolution? Are there attributes of GSIB resolvability, such as a Total Loss-Absorbing Capacity (TLAC) requirement, that could be put into place that would facilitate the resolution of a large insured depository institution without resorting to a merger with another large institution or a purchase and assumption transaction with another large institutions?
Question 10. To what extent would responses to Questions 1-9 differ for the consideration of merger transactions involving a small insured depository institution? Should the regulations and policies of the
By order of the Board of Directors.
Dated at
Executive Secretary.
Editorial note:This document was received for publication by the
[FR Doc. 2022-06720 Filed 3-30-22;
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